Energy Consumption and Economic Growth: Further Evidence from Taiwan

Abstract

This paper investigates the nonlinear relationship between energy consumption and GDP in Taiwan. By applying the method of Gonzalo and Pitarakis (2006), we consider the possibility of significant threshold effects within the long-run relationship between the two variables, where the effect is trigged by changes in the phase of the business cycle. The Granger-causality test in a threshold model indicates the relationship between energy consumption and GDP is regime-dependent. A bidirectional relationship between these two variables is observed in the contractionary regime, implying that energy serves as an engine of economic growth and that reductions in energy use will have adverse effects on economic activities. On the other hand, a unidirectional causality running from GDP to energy consumption is detected in the expansionary regime. It indicates energy conservation is feasible in this regime with little or no detrimental effects on economic growth. The policy implications are that energy use and economic growth are jointly reinforcing each other during recessionary periods. However, in periods of high economic growth when energy consumption cannot bring about economic growth, energy conservation policies should be adopted with more aggressive thinking.

A Review of the Nexus Between Energy Consumption and Economic Growth in the Brics Countries

“…The findings showed that energy has a strong effect on economic growth in China and energy Granger-causes economic growth. Kao and Wan (2017) focused on Taiwan to examine the relationship between energy consumption and economic growth. The results revealed a two-way causality flowing between energy consumption and economic growth.…”

Dynamic Effects of Energy Consumption on Economic Growth in an Emerging Economy

“…The main finding of these studies highlights a strong relationship between energy consumption and economic growth. A causality relationship between these variables are found in Taiwan and ten other Asian developing countries (Dahmardeh et al, 2012;Kao and Wan, 2017). These studies mention that energy which is used in many sectors have a significant contribution to economic development.…”

“…However, these studies found various results from each other which certainly be used as an appropriate reference for this research. Several papers focus on the relationship between energy consumption and economic growth (Farabi et al, 2019;Dahmardeh et al, 2012;Kao and Wan, 2017;Paramati et al, 2018;Karhan, 2019;Zeshan andAhmed, 2014, Ozturk, 2010). Other studies also elaborate on the impact of government policy including fiscal and monetary policies on economic growth (Bošnjak, 2018;Butkiewicz and Yanikkaya, 2011;Tule et al, 2018).…”

“…The papers which focus on the role of energy consumption on economic growth presents different results (Bashir et al, 2019;Dahmardeh et al, 2012;Kao and Wan, 2017;Karhan, 2019;Zeshan and Ahmed, 2014). The main finding of these studies highlights a strong relationship between energy consumption and economic growth.…”

“…Therefore, the role of energy consumption on economic growth needs more attention. Some previous studies provide the analysis results of the relationship between energy consumption and economic growth in various countries (Dahmardeh et al, 2012;Kao and Wan, 2017;Karhan, 2019;Zeshan and Ahmed, 2014). Most of these papers confirm the positive impacts of energy consumption on economic growth.…”